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CEIC Russia Data Talk: Oil and gas are the primary assets of Russia in terms of the government revenue they generate and the stable economic growth and social development that the industry support. Foreign trade, capital inflow from abroad, budget execution and redistribution of wealth for social needs and investments largely revolve around oil and gas production and revenues. While Russian natural gas exploitation is largely dominated by the state-controlled Gazprom, Russia’s oil market has been relatively decentralised and has seen its ownership structure evolve dramatically over the past twenty years. Various state-owned oil enterprises changed their form of ownership during a chain reaction of reorganisations, mergers and acquisitions, thus changing the shares of control by different companies throughout these years. However, recent developments in the Russian oil market demonstrate an inherent trend for centralization.
Rosneft became the leading oil mining company in the Russian market after the notorious acquisition of a significant stake in Yukos in 2004, the largest Russian oil extraction company at the time. This deal more than tripled Rosneft’s production capacity from 21.6 million tons in 2004 to 74.4 million tons by 2005, and devastated Yukos, which was torn apart and sold out after prosecution for tax evasion. Rosneft has since been increasing its capacity and gaining market share, which constituted 23% of overall Russian oil production as of the end of 2012.
The four leading oil producing companies, Rosneft, Lukoil, TNK-BP and Surgutneftegas, account for approximately 65% of total market production as of 2012 while each of the remaining oil companies accounts for less than 10% of oil production. Rosneft has continued its expansion in the Russian market with a new acquisition of TNK-BP announced in 2012 and finally completed in March 2013. Based on statistics as of the end of 2012, the combined Rosneft-TNK-BP share of production would account for 37% of total production.
The acquisition comes as Rosneft seeks greater leverage in both the local and foreign oil markets and greater economies of scale from combined production. This deal also serves political interests towards government control of the oil industry. The key decisions on the production volume, oil price, localisation and distribution, both domestically and abroad, will become more and more centralised, despite the Federal Antimonopoly Service’s findings of anti-competitive practices in previous years such as petrol price-fixing by various oil companies. Given the increasing centralisation of oil production, consumers might face higher oil prices owing to reduced competition. This is despite diversity of the oil market having spurred competition at least to some extent during the previous years. The trend towards monopolisation in the Russian oil market continues and perhaps we can expect further consolidation in the future.
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By A. Dembitski - CEIC AnalystBack to Blog